The Securities and Exchange Board of India (Sebi) has gone into ‘high alert’ mode with regard to front-running in mutual fund houses and broking firms, which is a serious stock market offence.
According to sources, auditors of the market regulator have started visiting fund houses and seeking call record data of fund houses and senior officials. In addition, they are also seeking backup data of transactions being made by fund houses for audit.
“Recently, Sebi auditors visited several fund houses, including one of the top five, and took transaction and call records of their fund managers and other key officials,” said a person close to the development, adding that the market regulator plans to approach other fund houses as well in the coming weeks seeking similar data.
“Sebi does not want to be caught on the backfoot when it comes to front-running cases. It is extremely worried that some fund houses are following the guidelines on paper and not in spirit,” said an industry source.
According to him, the idea is to keep the fund houses on their toes and ensure that guidelines are followed stringently.
Front-running is the practice of purchasing shares/ other securities based on advance non-public information regarding a large transaction that will affect the price of a security. It comes under the category of market manipulation and insider trading. It constitutes a serious violation and falls under the Sebi (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
Sebi will conduct a detailed examination of the data, emails and other documents. It may even pass ex parte orders against alleged wrongdoers. These actions have been initiated based on surveillance inputs and an internal alert system, said industry sources.
The move comes after allegations of front-running emerged in the recent past. Last year, Axis Mutual Fund had come under scrutiny for irregularities in some of its schemes. It had terminated two fund managers for an alleged breach of securities law.
According to reports, around a fortnight ago, the market watchdog had conducted search and seizure operations against market experts doling out stock advice on business news channels. It had seized records, including mobile phones, laptops, desktops, tablets and hard drive disks, to retrieve data for examination. The searches were carried out in Kolkata, Jaipur, Noida, and Pune.
It is not just mutual funds where front-running can take place, even dealers can use prior information to manipulate the price of stocks as happened in the India Infoline’s (IIFL) case. In June, the market regulator banned six entities from the securities market in the IIFL case because they had used mule accounts to carry out trades.
The mutual fund industry has faced several front-running cases in the past decade. While fund houses say they are putting in place more controls, such as keeping track of relatives and friends of key employees to make sure that front-running could be clamped down early on, it is actually a very difficult job. Some fund houses have also resorted to external reviews done on a quarterly basis.